One way regulators try and stop banks going bust is to impose capital requirements. Typically a bank has to ensure that capital it can count on as its own (‘own funds’) exceeds a proportion of its ‘risk-weighted assets’ – in essence, the money it is owed adjusted for the risk that it won’t be paid.
The banks’ own capital can be split into tiers. Tier one represents capital of the highest quality. This includes funds raised by issuing shares plus past profits. So if a bank has issued $200m of shares and made profits of $100m, its tier one capital is $300m. If risk-weighted assets total $1,400m, it has a capital ratio of 21% (300/1,400). If that is below the regulator’s target, the bank could be forced to raise fresh capital or sell assets.